It’s not unusual for businesses, particularly startups, to run into issues with the IRS. A common one is finding yourself in a situation where you fail to file your business returns. For whatever reason, if you find yourself in a situation where you have unfiled returns, it is essential to know that there are both financial and non-financial implications. Let us look at how unfiled tax can hurt your business.
Implications of Unfiled Taxes to your business
A Tax Lien
This is a lien where possession of your business property is taken over owing to unfiled taxes. The IRS may take ownership of your business property, such as building, electronic equipment, or even other properties that you own and are linked to your business. This can happen if you owe them more than $10,000 in tax arrears. After taking possession, they may file a lien of the property and sell to reclaim their money. They may make profits on your business. It is essential to know that tax liens may prevent you from other financial transactions.
This happens when the IRS takes over the bank accounts of your business. The IRS can give your bank a Notice of Levy. This enables them to draw funds directly from your accounts. Besides, you will be denied access to your money during this period, so that even the checks or debits you draw from the accounts will bounce. This move has the possibility of crippling your business activities
Substitute for Return (SFR)
After failing to file returns, the IRS can decide to file on your behalf. This is called substitute return, and it shows basic income and information and simple deductions. Usually, the results after substitute return may be overstated and may indicate that you owe more in unpaid taxes than you do.
Consequently, you will have to go to a tax court within 90 days to appeal and challenge the tax figure by the IRS. The reliable and straightforward way to handle such a scenario is to hire an attorney for unfiled tax returns to represent you in court. The attorney has the required knowledge to know how to defend you and save your business more damage. This will also allow you the time to focus on keeping your business productive to raise even more funds to pay the arrears.
Failure to do so will result in the IRS formally assessing the tax and taking collective action against you and your business.
Interests and Fees
Unfiled taxes can attract interest and fees. One of the penalties is not filing your taxes, and the other is for not paying on time. Usually, the failure-to-file penalty is a fixed 5% of your balance due every month. It is worth noting that a fee can go up to 25% of the unpaid taxes.
Similarly, the failure-to-pay penalty is 0.5% of your balance due each month. Like the failure-to-file penalty, the charges here may rise to the cap of 25%, therefore, affecting your business negatively from a financial perspective.
Inability to Access Credit
At one point or another, you may want to get financial aid from banks and other lenders. Most banks and commercial agencies will require you to have copies of your prior tax filings. If you haven’t been filing taxes, likely, you will not have your tax certificate to show your credibility. As a result, your loan request might be declined.
Besides, if you have a tax lien, it will appear on the credit search, and the lender might turn down your request to access credit and grow your business.
Revocation of your Business License
The IRS can also send a certificate of non-compliance to the business licensing authority with a request to revoke your company’s operating license. The licensing authority then acts on instructions from the IRS and revokes your business permit or license. As a result, you will have to close down your business or fight back against the IRS as you cannot operate legally without a license. Again, this step might have negative financial implications for your business and on you as the owner.
Filing tax returns on time is one way of protecting your business reputation and relationship with financial lenders and government agencies. In case you fail to file, and you have unfiled taxes, it is crucial to be aware of the implications that may have on your business. In this regard, you have to fix the issue fast to avoid complications. Talk to a tax attorney for help if you are tangled in such a situation.